Economic Policy Objectives Flashcards
What are the three major objectives of macroeconomic policy? Define each objective
Economic Growth
Price stability
Full employment
How successful has Australia been in accomplishing these three objectives in the past 5 years?
Over the past 5 years, economic growth has hovered around 2-2.5% until 2019 it began drastically falling to approx. -6% in 2021. In 4 of the last 5 years, inflation has been below 2%. Over the past 5 years, unemployment has been around 5.8% and has increased to 7.4% in 2021.
Outline the economic costs of economic growth being too high or too low
When economic growth exceeds 5%, it is unsustainable in a mature economy and puts pressure on factor markets and risks putting pressure on factor prices.
When economic growth is slow (below 2%) there is insufficient demand to fully employ resources.
Outline the economic costs of high levels of unemployment
A direct monetary cost arises because unemployment results in lower levels of aggregate consumption, investment and business confidence, and increases the welfare payments paid to the unemployed from tax payers pockets.
Unemployment also has an opportunity cost - the alternative use of taxation
Explain, using examples, the phrase ‘compatible economic objectives’
Economic objectives that can be targeted simultaneously, because the policies used to achieve the are complimentary.
Examples:
Economic growth and full employment
Price stability and economic growth
Full employment and equitable distribution of income
Why is it impossible for all objectives to be achieved simultaneously?
Because some of the macroeconomic objectives are difficult to target at the same time such as:
Price stability and full employment
Economic growth and price stability
Economic growth and structural unemployment
Describe the time lags which can impact on the effectiveness of economic policy
Recognition lag - data is out of date
Decision lag - time taken to create a policy
Effect - time taken for policies to take effect
